Branch Accounting and its need

Branch accounting

Q. What is a branch?

A. A branch may be defined as a section of an enterprise, geographically separated from the rest of the business, controlled by a head office, and generally carrying on the same activities as of the enterprise. A branch is not a separate legal entity, it is simply a segment of a business.

Q. What is branch accounting?

A. Branch accounting is a bookkeeping or accounting system in which separate accounts are maintained for each branch or operating location of an organisation that allows geographically dispersed corporations, multinationals and chain operators, to keep track of financial transactions at each branch individually and also to consolidate the same at the main branch or head office. It allows greater transparency in the transactions, cash flows, and overall financial position and performance of each branch.

Q. Why is branch accounting needed?

A. An enterprise sets up its branches at different geographical locations to penetrate a new market and increase its overall turnover, eventually to generate profits. All the activities carried out at different branches are carried out under the direction and control of the head office. Thus, it is necessary for the head office to acquire all information from its branches for proper functioning of the branches and to run them profitably. Here, arises the need for branch accounting. The need for branch accounting can be summarised in following points:

  1. ascertain the profitability of each branch separately for a particular accounting period,
  2. ascertain the financial position of each branch separately at the end of that accounting period.
  3. Assess the progress and performances of each branch,
  4. Fulfil the audit requirements under Section 228 of the Companies Act, 1956
  5. Incorporate the profit or loss made by the branch and its assets and liabilities bin the firm’s final accounts,
  6. Ascertain the requirements of stock and cash for each branch,
  7. Ascertain whether the branch is yielding satisfactory rate of return on capital invested in it,
  8. Ascertain whether the branch should be expanded or closed,
  9. Ascertain the quantity of stock held by each branch at the end of that accounting period, and
  10. Ascertain the amount of commission payable to the manager, if that is based on profits.

  

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